Servitization in Healthcare

Dr. Arsham Mazaheri . July 30th 2023

Servitization in the Healthcare Industry

The healthcare industry, the provider of critical services and essential products, has traditionally centered its strategies around the provision of tangible items.

However, in an ever-evolving landscape, merely offering products is no longer the ultimate level of care. Enter servitization—a transformative approach that's reshaping how healthcare operates.

Servitization in the healthcare industry means shifting from just providing medical treatments to offering a broader range of services, such as wellness programs and remote patient monitoring, to improve patient outcomes and experiences.

Instead of a mere transaction where a product is handed over, servitization emphasizes the entire lifecycle of that product, enveloping it with relevant services that amplify its value.

Servitization essentially strengthens the bond between the provider and the consumer. It goes beyond the initial sale, ensuring that medical products are complemented with services that enhance patient outcomes, streamline hospital operations, and provide holistic care solutions. With Servitization, the industry is not just selling a product; it's ensuring that the product delivers its maximum potential throughout its lifespan; and in an arena as critical as healthcare, this shift is not just beneficial—it's revolutionary.

Servitization Benefits for Healthcare Industry

There are numerous benefits for both hospitals and equipment manufacturers as we move toward servitization. Here is a thorough examination of the numerous advantages that this revolutionary business model provides:

For Equipment Manufacturers:

The benefits the healthcare device manufacturers get from shifting their business model from one-time sale to Servitization is more or less the same as the other manufacturers in other industries get when doing this shift.

Steady Revenue Streams: Shifting from one-time sales to recurring revenue models provides a consistent and predictable financial foundation. This stability can foster long-term planning, innovation, and R&D.
Deeper Customer Relationships: Regular interactions and service provisions mean more touchpoints with customers. This can lead to stronger bonds, long-term collaborations, and insights into customer needs.
Competitive Edge: In a saturated market, offering value-added services alongside traditional products can differentiate manufacturers from competitors. It can be the unique selling proposition that draws healthcare institutions to a particular brand.
Enhanced Product Lifecycle: Offering services like maintenance and upgrades can extend the lifespan of products, ensuring they remain relevant and in use for longer durations, thus generating more value for the customers as well as higher profit margins for the manufacturers.
Feedback Loop for Innovation: Regular customer interactions give businesses a direct line to customers, who can provide priceless input. This can help manufacturers better tailor their products to the needs of customers and inform product development.

For Hospitals (End-users):

Enhanced Patient Care: Complementing medical products with value-added services can lead to a more holistic care approach. Whether it's better equipment maintenance leading to fewer downtimes or training services ensuring optimal product usage, patient care is elevated.
Operational Efficiency: Integrating services can simplify operations. Instead of juggling multiple vendors for various needs, hospitals can consolidate their requirements with a single, comprehensive service provider.
Cost Predictability and Savings: While there might be initial investments, long-term bundled services can be more economical. Subscription models can offer more predictable budgeting compared to sporadic large equipment purchases.
Future Readiness: With service contracts often including upgrades and updates, hospitals can ensure they're always working with the latest technologies and practices, keeping them at the forefront of medical care.
Tailored Solutions: Servitization often brings customization. Hospitals can collaborate with manufacturers to tailor services to their specific needs, ensuring a better fit and more efficient outcomes.

The shift toward servitization in the healthcare industry has enormous potential. Delivering unmatched value at each stop along the healthcare journey is the overarching goal as both manufacturers and hospitals navigate this transition.

Popular Advanced Services in Healthcare industry

As the healthcare industry undergoes a transformative shift towards servitization, a plethora of innovative service offerings has emerged, enriching patient care, streamlining operations, and enhancing the overall healthcare experience. Here are some of the distinguished service types:

Remote Patient Monitoring: Beyond the confines of traditional device-driven metrics, this service offers a holistic system where companies furnish the necessary equipment and, crucially, analyze patient data in real time. The real value here isn't just in monitoring but in translating that data into actionable insights, arming healthcare professionals with vital information for timely interventions.
Maintenance-as-a-Service: The administrative burden of tracking warranties and liaising with a maze of vendors is now a relic of the past. This service simplifies maintenance, with manufacturers ensuring regular check-ups, timely updates, and expedited repairs, thereby guaranteeing equipment functionality when it's most needed.
Training & Onboarding: The modern healthcare professional needs more than a cursory glance at an instruction manual. Recognizing this, companies are offering immersive training modules, harnessing tools from VR (Virtual Reality) simulations to hands-on workshops, ensuring staff are well-equipped to harness the full potential of new equipment and software.
Equipment-as-a-Service: Capital investment concerns are alleviated as hospitals can now lease top-tier equipment. This model ensures consistent access to the latest technological advancements, without the drawbacks of wear and tear or outdated technology.
Value-added Services: Beyond the sale, manufacturers are stepping up to offer a suite of additional services spanning from installation to dedicated support. The emphasis here is ensuring optimal product utilization, directly translating to elevated patient care standards.
Telehealth Services: Servitization expands the scope of conventional healthcare delivery by emphasizing the value of remote consultation. This extends healthcare's reach, democratizing access, especially for those in remote or traditionally underserved regions.
Data Analytics and Insights: The data flood from numerous healthcare devices is utilized. Recognizing the gold mine of insights, manufacturers are now providing data analytics services. For healthcare providers, this means optimized workflows, richer patient outcome insights, and an eagle-eye view on emergent health trends.
Flexible Payment Models: The financial dynamics of healthcare are getting a facelift with pay-per-use or subscription-based models. By bypassing hefty upfront costs, healthcare providers find flexibility and financial prudence in tandem.
Predictive Maintenance: With the advent of IoT and AI, the passive model of equipment maintenance is pivoting to a proactive one. Utilizing real-time performance metrics, manufacturers can anticipate maintenance requirements, greatly reducing downtime and ensuring flawless equipment operation.

This holistic and integrated approach to healthcare, with manufacturers, healthcare providers, and patients at its core, exemplifies the servitization ethos. By dovetailing tangible products with value-augmented services, servitization amplifies value for all stakeholders, promising a brighter, more efficient, and patient-centric healthcare future.

Servitization of Digital Healthcare Technologies

The servitization model, especially in the context of digital healthcare technologies, offers a promising pathway to address pressing challenges in healthcare inclusion, especially in developing nations; here are some of the pivotal facets of this transformative trend:

Servitization of Medical Equipment: Instead of selling medical equipment as an outright purchase, manufacturers offer their use as a service. Hospitals, especially smaller ones in resource-constrained settings, can access high-end equipment on a pay-per-use basis. This approach diminishes financial barriers for healthcare facilities, enabling them to offer advanced treatments without bearing the brunt of hefty initial investments. Consequently, patients benefit from enhanced healthcare access at reduced costs.
Servitization of Healthcare Platforms: Riding on the waves of increased internet penetration and mobile accessibility, digital healthcare platforms transition from mere online pharmacies to holistic health solution providers. This involves offering services like teleconsultations, promoting both treatment access and medication adherence. Companies like “Tata 1mg” and “Practo” are emblematic of this trend, extending comprehensive healthcare solutions to a wider demographic, especially crucial during scenarios like the pandemic.
Servitization of Health Informatics: The introduction of AI and ML to health informatics has ushered in a new era in which platforms like IBM Watson Health offer AI-driven insights on a pay-per-use basis, greatly improving healthcare delivery and research initiatives. Healthcare costs, particularly for complex treatments, are poised to decrease by democratizing access to cutting-edge AI capabilities, leveling the playing field for patients across the board.
Servitization of Mobile Health: The ubiquity of smartphones has catalyzed the development of health-centric mobile applications. While these apps span a vast array of functionalities, from diabetes management to exercise recommendations, the essence remains consistent – health solutions at one's fingertips. A regulated environment, ensuring data security and app efficacy, will usher in a golden age of mobile health, underpinning self-management and improved health outcomes.
Servitization of Smart Health: The IoT revolution promises a connected health ecosystem, where devices continuously monitor, record, and communicate health vitals. Think of smart homes equipped with devices that effortlessly synchronize patient data with caregivers, fostering real-time health interventions. While these technologies won't replace conventional healthcare solutions, they are bound to complement them, enhancing care quality, especially for chronic and geriatric patients.

While still in its early phases, there's little doubt about the transformative potential of digital healthcare servitization. By pivoting from product-centricity to outcome-oriented solutions, the healthcare industry stands on the cusp of addressing long-standing challenges of availability, accessibility, and affordability, especially in regions marred by health disparities. The synergistic collaboration between stakeholders, encompassing governments, tech giants, healthcare providers, and the patient community, will be instrumental in realizing this vision, sculpting a future where health inclusion isn't aspirational but a tangible reality.

Servitization Challenges for Healthcare Industry

The contemporary healthcare landscape is characterized by an intricate interplay between evolving technologies and patient needs. While institutions endeavor to offer the best care, they grapple with escalating costs, disparities in access, and rapid technological advancements. Servitization promises to reshape this landscape by shifting the focus from selling products to delivering holistic, outcome-driven services. However, the transition is not without challenges. Both healthcare providers (like hospitals) and technology manufacturers confront a spectrum of hurdles as they traverse the path of servitization.

Challenges for Hospitals:

Complex Regulatory Environment: The healthcare sector is stringently regulated. It can be difficult to adhere to these while integrating new service-driven solutions.
Resistance to Change: Established procedures, routines, and structures can often lead to institutional inertia, making it challenging to adopt new service-based models. This is a challenge for hospitals both from the perspective of their own staff and from the patients’s views. The patients speciafically should see and feel the distinct benefits in order to agree and collaborate to the change.
Data Security and Privacy Concerns: With digital services, hospitals handle vast amounts of sensitive patient data; therfore it is crucial to maintain patient privacy and ensure the system's security.
Interoperability Issues: For effective servitization, different digital systems within a hospital must communicate seamlessly. Overcoming interoperability issues is crucial here.
Training and Education: New services necessitate new skills. Investing in robust training and education initiatives for staff becomes imperative if the success of the transition is desired. This can be seen as much a challenge for hospitals as for manufactures. Providing services isn't just about technology. It's also about ensuring clients (i.e. hospitals) can effectively use them.
Performance Metrics and ROI: Establishing clear metrics to gauge service effectiveness and determining the return on investment (ROI) can be intricate.
Cultural and Organizational Shifts: Moving from a product-based to a service-based paradigm might necessitate profound cultural and organizational realignments.

Challenges for Manufacturers:

High Initial Costs: Transitioning to a service model often involves steep upfront investments in infrastructure, training, and technology. This is actually one of the main challenges for the manufactures in any industry who wish to transform their business model from product centric to service centric.
Resistance to Change: Like hospitals, manufacturers too have ingrained practices. Breaking away and embracing servitization can be daunting. Normally this shall be managed with a very well planned change management process to make sure the transition can be done as smoothly as possible. For example, moving from sales to services might require restructuring incentive systems for sales teams and other stakeholders to manage this change.
Data Security and Privacy Concerns: As manufacturers offer digital solutions, they must prioritize data security, especially when these services are patient-facing. This actually could become the Achilie’s hill of the transition for the healthcare industry, as the public as well as the governmental bodies (specially in EU) are nowadays more concerned and sensitive regarding the data privacy.
Interoperability Issues: Manufacturers must make sure their service solutions seamlessly integrate with the numerous systems used by hospitals.

Liability and Insurance Considerations: As manufacturers provide crucial medical services, they must navigate the intricate maze of liabilities and ensure they are adequately insured. This is because the shift towards services makes the determination of liability, in case of malfunctions or errors, more complex. Thus, adequate insurance policies must be in place to mitigate that risk.

Examples of Servitization In the Healthcare Industry

Numerous healthcare organizations have led the adoption of servitization in recent years. These businesses have combined their cutting-edge products with customized services to redefine value propositions and deliver transformative solutions to healthcare providers and patients after realizing the enormous potential that integrated services offer. Following are a few representative case studies from the industry:

Philips Healthcare - Managed Equipment Services (MES): Philips, a cornerstone of the medical equipment domain, launched its Managed Equipment Services. Rather than merely selling medical imaging devices, they couple it with a suite of associated services like maintenance, system upgrades, and real-time performance monitoring. The outcome? Healthcare establishments can tap into state-of-the-art imaging tech without the deterrent of hefty initial investments. Institutions have seen measurable advancements in patient care, increased equipment dependability, and operational streamlining thanks to MES.
Siemens Healthineers - Atellica Solution: Siemens Healthineers unveiled the Atellica Solution, which stands out as a scalable and malleable diagnostic platform for labs. But, their offering doesn't halt at the product. Siemens bundles the system within a comprehensive service ecosystem, spanning equipment upkeep, personnel training, and distance-based system supervision. This servitization stride has empowered diagnostic centers to supercharge workflow efficiency, drastically trim downtime, and vouch for consistent and dependable testing outcomes.
GE Healthcare - Continuous Patient Monitoring Services: Venturing beyond traditional care, GE Healthcare has championed continuous patient monitoring services. Such services empower healthcare professionals to monitor patient vitals and health states remotely, fostering early intervention and timely issue detection. The results are telling: enhanced patient health outcomes and a marked reduction in recurrent hospital admissions.
Medtronic - Integrated Diabetes Management Solutions: Medtronic's journey in servitization is striking. In addition to giving patients insulin pumps and continuous glucose monitors, they have incorporated individualized coaching sessions, thorough data analysis, and useful insights. This all-encompassing approach to diabetes management does more than just provide a service or a product; it paves the way for efficient disease management, significantly improving patient quality of life.
Cerner Corporation - Health IT Solutions: Cerner Corporation has become a leader in the field of health informatics. Their wide range of services, from electronic health documentation systems to comprehensive population health management solutions, has played a crucial role in changing the dynamics of the healthcare system. Cerner has accelerated improvements in patient care and operational fluidity by integrating services into its IT products.
Roche Diagnostics - Lab Service Solutions: Roche Diagnostics has unfurled its lab service solutions in recognition of the crucial part diagnostic equipment plays in patient care. These include meticulous calibration, instrument maintenance, and remote diagnosis. Roche's servitized offering minimizes operational hiccups and supports patient test accuracy by ensuring diagnostic equipment operates at its peak.

The above examples show how servitization in healthcare has the power to transform. These businesses have opened up new value-creation channels by fusing their flagship products with custom services. They've strengthened their symbiotic relationships with healthcare organizations while fundamentally reshaping patient care paradigms. They haven't just improved their operational matrices or bottom lines.

Conclusion

Servitization in healthcare is more than just a transition; it's a transformative strategy for delivering superior patient care and achieving operational efficiency. Pioneering companies like Philips, Siemens, and Medtronic have demonstrated the undeniable potential of merging product innovation with tailored services. However, embracing this shift is not without challenges. Navigating the intricacies of this integrated framework requires a strategic partner who understands both its complexity and promise.

Diving into servitization might feel daunting, but with Avrogan as your partner in smarter business, it becomes a powerful tool. Avrogan's specialized consulting combined with its state-of-the-art service contract management SaaS solution for configuring, pricing, monitoring, and managing advanced service contracts ensures that the leap into servitization is both strategic and seamless. Our dedication isn't merely about providing services but weaving them into your organization, maximizing value at each interaction.

In essence, servitization in healthcare isn't a momentary trend—it heralds a future where patient care and value-centric strategies reign supreme. For those in the healthcare sphere seeking to redefine their service offerings and enrich patient experiences, Avrogan stands as your trusted partner. Step into this promising era with us and witness healthcare excellence unfold.

Does Avrogan support pricing excellence initiatives?

Yes, any manufacturing company requires to establish processes and methodologies to achieve pricing excellence in Product pricing, Spare Parts pricing, Service pricing (both legacy and digital services), and data monetization. Avrogan’s team can support the operational deployment of such initiatives.
What is high-quality pricing?

High-quality pricing is pricing that is easy to explain and defend to the customer. Such pricing is in proper alignment with the brand positioning within the market and in comparison, with other competitors. Customers can easily relate to the prices and there is a willingness to pay for the prices.
What is the main pricing methodology that Avrogan can support our organization with?

We support the operational transformation to Value-based and market-driven pricing as the main methodology that can properly reflect customers’ perception of value to make sure no business is lost due to over-and underpricing. Over-and underpricing is the common result of cost-based pricing or blind following of competitors.
Why should we focus on price improvement rather than cost reduction?

Pricing is the strongest lever in business to improve profitability. Within the manufacturing industry, 1% price improvement can result in 3 to 7 times margin improvement in compare with improvement in other levers such as Cost, Volume, etc.
What is pricing power?

In simple terms, it is your ability to increase prices without losing a considerable number of customers. If you are scared that many customers will leave you due to your price increase, your pricing power is probably low.
Why pricing power is important?

“Pricing power is the most important factor in evaluating businesses…” Waren Buffet
How can we improve our pricing power?

By improving your pricing quality. High-quality pricing is easy to defend and explain. You don’t need to give away in discounts to persuade the customer to pay the price. In other words, your price should be in harmonization with customers’ value perception in the market.
Why cost-based pricing is not the best option?

Direct reliance on cost for pricing will increases the chance of low-quality pricing. Cost levels are usually defined based on factors that are not in your control and customers cannot relate to them if you pass the cost by adding a constant margin on top to the customers. It is also hard for the sales teams to defend such prices towards the customers and usually being crushed by customers’ urge for discounting.
How Avrogan’s way of working can support the transformation toward high-quality pricing?

While we have a look at market conditions, competitors, and cost as guidance metrics, we try to measure and grasp customers’ value perception and willingness to pay with the help of various quantitative and qualitative studies and analyses. The aim is to put the pricing into the context of different products and offerings of the business and draw a harmonized pricing logic across each category of offerings to create a consensus across the organization about the value that is offered and the value to be captured.
Is value-based pricing about increasing the prices?

No, the goal is to make sure all prices are in harmonization with customer perception of value. In this process, some prices will be increased, and some will be decreased. Therefore, businesses can expect improvement both in margin and volume for the whole business
What is the typical gain out of pricing excellence initiatives?

We have seen companies can easily achieve 5% to 15% gross margin improvement as a result of pricing excellence initiatives for products and spare parts. The ultimate gain depends on the readiness and the effort deployed by the business in realizing the profitability impact.
What is a typical project length?

Depending on the scope, operational pricing projects take between 3 to 9 months. For a more detailed estimation please contact us.
We have deployed a pricing excellence initiative couple of years ago, but we lost the knowledge during the years. How Avrogan can support us?

It is a challenge that some companies lose track of their achievements over couple of years, as the knowledge is not passed on properly within the organization. We always suggest and provide easy-to-maintain documentation, plus we suggest the usage of pricing management solutions. ERP or excel are not proper tools to maintain and manage sophisticated pricing frameworks and logic.
Can Avrogan support our pricing solution acquisition process?

Yes, Avrogan’s team has high knowledge of existing pricing solutions in the market for the manufacturing industry. We can support your required documentation and selection process.
What are the steps in value-based pricing for spare parts?

We start with creating a pricing-focused product structure where we can put together similar spare parts into groups. Then we defined value drivers together with your product specialists and marketing teams. In the next step, the data values of these value drivers are gathered. In the final, step a pricing logic is defined based on the value drivers and with the look at market conditions, any available competitor data, and of course margins. This logic creates a central reference price. This reference price is then transformed into suggested market prices by applying the market price level adjustment factor. When prices are ready, feedback will be gathered from marketing, product management, and sales teams to assure the acceptance of the new prices before market implementation.
We have bad data quality; can we still apply value-based pricing for our aftermarket business?

You are not alone. We have seen such challenges over and over and we have different solutions to still navigate through such challenges. Contact us to discuss a detailed proposal for your business.
Why cross-border business happens?

Cross-border business happens when there is enough price gap (list or net) between two market regions where a trader can sell the product at a lower price in the landing market while they realize an acceptable profit. As a rule of thumb, a trader should have a minimum of 15% of margin after all costs for the trade to start doing the trade.
What is the actual damage of cross border business for our company?

It depends on who performs the trade. If the cross-border trading happens by the company’s sales network, the damage is proportional to lost market value for the landing market’s sales company. If it happens by a third party, the damage is the total loss of market value for the landing market. It will anyway affect the price positioning of the company within a specific market and will put higher pressure on margins.
We have a cross-border business issue. How can we improve that?

Avrogan’s team has experience and tools in assessing the risk and mitigating it by improving pricing harmonization across markets where your business is active. To have an assessment of the potential risk in your business contact our team.
How can we increase the success rate of our pricing excellence initiative?

It is important to share the information about the initiative from the beginning and involve all relevant stakeholders within the project to assure the high-quality results and acceptance of the new prices. In this process receiving proper feedback and involving the sales teams are crucial.
Can Avrogan support the change management process and go to market activities?

Yes, we have the training and a structured sales enablement methodology to support the release of new prices to the market and how sales teams should respond to tough questions from customers.
We need support on where to start with pricing. Can Avrogan support that?

Yes, we have maturity and readiness assessment tools that we can apply to your business. To get more details please contact us.
What kind of market research methodology should we use for improving our pricing quality?

There are different methodologies for different purposes. Some of such market research methods are more qualitative like the VEL study which defines the perceived brand and price positioning of the business in the market, while some others are more quantitative like Conjoint analysis which can support defining price threshold and market share potential through statistical analysis. Please contact us to design the proper market research model for your business.
We need to improve and align pricing knowledge across our organization, can Avrogan support that?

Yes, we have detailed and operational pricing training for products, spare parts, and service pricing. Please contact us to review the syllabus and design the most appropriate educational program for your team.
What differentiates a product-centric model from a service-centric model in manufacturing?

A product-centric model focuses on selling products as a one-time transaction, while a service-centric model, often seen in servitization, focuses on selling the product bundled with value-added services to foster long-term customer relationships and recurring revenue.
How does servitization benefit customers?

Servitization can offer customers greater value by providing a comprehensive solution with lower risk and higher performance that goes beyond the product itself. This can include tailored services, improved customer support, increased reliability, and reduced total cost of ownership.
How can servitization impact revenue streams?

Servitization can diversify and stabilize revenue streams by generating recurring income from service contracts. This is in addition to the traditional one-time income from product sales. Additionally, increasing the service revenue, which normally has higher margins, will increase the profitability and thus improve the bottom line.
What role does data analytics play in servitization?

Data analytics is crucial in servitization as it helps businesses understand customer behavior, predict service requirements, personalize offerings, and make informed decisions. This data-driven approach enables companies to optimize their service delivery and enhance customer satisfaction.
What impact does servitization have on sustainability and the circular economy?

Servitization can contribute to sustainability by encouraging the efficient use of resources and reducing waste. This is because a service-centric approach often includes maintaining and upgrading products over time, rather than replacing them. This can help foster a circular economy, where resources are used as long as possible, extracting their maximum value.
How does servitization fit into the Internet of Things (IoT)?

Servitization and IoT go hand-in-hand. IoT devices can collect and analyze data to provide insights that help companies deliver tailored services, predict maintenance needs, and create new revenue opportunities.
How does servitization fit into Industry 4.0?

Servitization fits perfectly into the concept of Industry 4.0, a term that refers to the fourth industrial revolution characterized by the digitalization and interconnection of industrial processes. In Industry 4.0, technologies such as the Internet of Things (IoT), Big Data, Artificial Intelligence (AI), and cloud computing have a transformative impact on the way businesses operate. These technologies enable businesses to collect and analyze vast amounts of data in real-time, leading to a better understanding of customers' needs, improved operational efficiency, and the creation of new business opportunities.
How does servitization impact competitive differentiation?

With servitization, companies can differentiate themselves by offering unique value-added services that competitors may not or cannot offer, because normally service offerings are connected to expertise and know-how knowledge than a physical product that in many cases can be replicated or have alternatives. This enhances customer loyalty and provides a competitive edge in the market.
What is the relationship between servitization and customer loyalty?

Through servitization, businesses aim to nurture long-term relationships with customers. By delivering a combination of products and high-quality services tailored to customers' needs, they can enhance customer satisfaction and loyalty, and transform them to “clients”!

Dr. Arsham Mazaheri

Chief Operating Officer

Arsham is a data scientist by background, with 17+ years of industrial and managerial experience in various disciplines. Throughout his career, Arsham has helped many of Fortune 500 companies with their data and requirement challenges and has been involved in many IT solution implementation projects. Arsham has both mechanical and industrial engineering backgrounds and has a D.Sc. in Risk Management from Aalto University in Helsinki, Finland. He is a certified change and problem manager (CCM & CPCM) and holds an MBA in shipping and logistics.